Jeffrey Wade
A cash call is a reinsurance contract provision that allows a ceding company to make a claim and receive immediate payment for a large loss without waiting for the usual periodic payment procedures. It is common in proportional contracts and may contribute to reducing the primary insurer's treasury needs. A cash call is typically in the form of an invoice, due and payable upon receipt, and includes a copy of the cost estimate from which the cash call is being made.
| Characteristics | Values |
|---|---|
| Definition | A reinsurance contract provision, common in proportional contracts |
| Who does it apply to? | Ceding companies |
| What does it allow? | The ceding company to make a claim and receive immediate payment for a large loss |
| What does it eliminate the need for? | Waiting for the usual periodic payment procedures to occur |
| What does it contribute to? | Reducing the primary insurer's treasury needs |
| What must be done to ensure it is not counted twice? | The cash loss must be represented clearly in the Accounts |
| What is the format of a cash call? | An invoice, due and payable upon receipt by the non-operator |
| What must be included with the invoice? | A copy of the Cost Estimate from which the cash call is being made |
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What You'll Learn
Cash call defined in reinsurance contracts
A cash call is a provision in a reinsurance contract that allows a ceding company to make a claim and receive immediate payment for a large loss without waiting for the usual periodic payment procedures. In other words, it is an agreement between the ceding insurer and the reinsurer that provides for the immediate payment of a claim.
Reinsurance is a form of insurance for insurance companies, or a way for an insurance company to diversify its risk portfolio. It involves the transfer of risk from one party (the insured) to another (the insurer), with the insurer promising to pay the insured for losses sustained from unexpected events. Reinsurance contracts can be proportional, where the risk is shared between the insurer and the reinsurer, or non-proportional, where the reinsurer takes on all the risk above a certain threshold.
A cash call provision is common in proportional reinsurance contracts. It allows the ceding company to receive immediate payment for a large loss, without having to wait for the usual periodic payment procedures. This can help to reduce the primary insurer's treasury needs.
A cash call is typically invoked when the losses incurred by the ceding company exceed a certain threshold, such as a percentage of the net written premium or a specific dollar amount. Upon request from the ceding company, the reinsurer is required to pay any amount with regard to a loss settlement that is scheduled to be made within a specified period, typically within 10 days of receiving the demand for payment.
Overall, a cash call provision in a reinsurance contract allows for the prompt settlement of large losses, providing financial relief to the ceding company and ensuring the timely payment of claims to the insured.
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Cash call in relation to loss settlements
A cash settlement is a straightforward financial transaction where the insurance company pays money to the homeowner as compensation for losses or damage sustained to their property. The insurance company determines the figure based on their evaluation of the claim. This amount may not always meet the claimant's expectations or cover additional costs incurred.
Home insurance policies are legally binding contracts between the policyholder and the insurer. The terms of these contracts specify the responsibilities of both parties, including the insurer's obligations when a claim is made. Generally, these policies outline two primary methods of compensation for covered losses: reinstatement (repair or rebuild) or cash settlement.
In the case of a cash settlement, the recipient has complete discretion in how they use the money received. Cash settlements may be chosen when the cost of repair or replacement is unknown, or when the affected party would prefer cash over having repaired or replaced items. For example, if the homeowner intends to sell the property, they can use the cash settlement to forego repairs and make up for any losses they might make in the sale.
However, in most cases, a cash settlement will not be the most beneficial outcome for a homeowner. This is mainly due to the reduction in the settlement value received. Insurers will not give the cost of VAT on the repairs, resulting in an instant 20% reduction in the value of a cash settlement. The insurance company will also only give the equivalent cash value to the cost that they would have paid for the rebuild to be carried out by one of their chosen contractors, who may offer the insurer preferential rates. As a result, the cash settlement may not cover all the necessary repairs.
It is recommended that homeowners obtain estimates for all aspects of the repair and progress towards the authorisation of the works before considering whether to request a cash settlement. Once a repair estimate has been authorised, the insurance company will be held accountable for fulfilling their obligation to pay the agreed-upon settlement amount, preventing further disputes in the future.
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Cash call rights after an IPO
A cash call is a reinsurance contract provision that allows a ceding company to claim and receive immediate payment for a large loss without waiting for the usual periodic payment procedures. This is common in proportional contracts.
After an IPO, a company's shares become public, and employees can sell their stock for cash after a certain period. This period is typically between 90 and 180 days, but it can be longer for management with access to more sensitive information.
Rights issues are a way for companies to raise capital after an IPO by inviting existing shareholders to purchase additional shares at a discount. Shareholders are not obligated to purchase these shares, but they have the right to buy them before a stated future date. This allows cash-strapped companies to raise money when they need it, often to pay down debt.
Shareholders can also trade these rights on the open market before and up to a specific expiration date. These rights are called renounceable rights and become known as nil-paid rights after they have been traded. The value of nil-paid rights can be estimated by subtracting the rights issue price from the ex-rights price. For example, if the ex-rights price is $4.92 and the rights issue price is $3, the nil-paid rights are worth $1.92 per share.
Selling these rights will create a capital gain, but it is a taxable event.
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Cash call in drilling operations
In the oil and gas industry, cash calls are a critical financial mechanism. They refer to the request for funds made by the operator to its joint venture partners to cover anticipated costs for project operations, including exploration, drilling, and production. This ensures that the operator has the necessary capital to carry out planned activities, while also maintaining financial equity among participants.
For instance, Petrogen may send a cash call letter to Alexander Long, requesting their share of estimated dry hole costs as per their Participation Agreement. This letter serves as an invoice, detailing the amount that needs to be paid and the methods of payment.
There are several types of cash calls in drilling operations:
- Monthly cash call: This refers to regular requests made to joint venture participants to contribute their share of anticipated monthly expenditures, based on the operator's monthly budget.
- Supplementary cash call: This type of cash call is requested when additional funds are required beyond the initial budget. It may arise due to unforeseen expenses or changes in the project scope.
- Contingency cash call: These cash calls are made to create a reserve fund for unexpected expenses or potential cost overruns, providing a financial buffer for unforeseen events.
Cash calls are an important part of the financial structure in the oil and gas industry, allowing for the management of liquidity, accurate budgeting, and alignment of financial commitments with operational needs and timelines. They are also crucial for ensuring financial stability and facilitating risk-sharing among partners.
To effectively manage cash calls, professionals in the industry can undertake training courses that cover topics such as contract types, accounting practices, budgeting, and auditing procedures. These courses enhance their understanding of joint venture operations and cash calls, enabling them to navigate the complexities of this high-stakes field with confidence.
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Cash call and the primary insurer's treasury
A cash call is a reinsurance contract provision that allows a ceding company to make a claim and receive immediate payment for a large loss without waiting for the usual periodic payment procedures. The cash call provision is common in proportional contracts.
Upon request, the reinsurer must pay any amount regarding a loss settlement scheduled to be made within the next 20 days by the company. The payment is made within 10 days from the date the demand for payment was transmitted. The cash call amount is determined by the dry hole cost, and each non-operator is invoiced for their proportionate working interest.
All cash call monies must be received before the commencement of operations. Failure to pay the cash call before operations may be considered an election not to participate in the operations.
A cash call may contribute to reducing the primary insurer's treasury needs. The cash loss must be represented clearly in the Accounts to ensure it is not counted twice.
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Frequently asked questions
A cash call is a reinsurance contract provision that allows a ceding company to claim and receive immediate payment for a large loss without waiting for the usual periodic payment procedures to occur.
A ceding company is an insurer that passes on all or part of the financial interests of insurance policies written by them to another insurer (the reinsurer).
A reinsurance contract is an agreement between an insurer and a reinsurer, where the reinsurer agrees to indemnify the insurer for losses in excess of a specified retention.
The purpose of a cash call is to provide immediate financial relief to the ceding company in the event of a large loss, reducing the potential impact on the company's treasury.
Upon a cash call, the reinsurer is required to pay any amount with regard to a loss settlement scheduled to be made within the next 20 days, provided they receive satisfactory proof of loss. The payment is typically due within 10 days of the demand.
